Historically, regulation of insurance companies has tended to follow developments and approaches which originated in banking. The EU’s Solvency II is a classic example.
Similarly, the minimum capital and “systemically important” concepts now prevalent in banking have also begun to migrate to the insurance arena, through the Basic Capital Requirement (BCR) and Global Systemically Important Insurers (G-SII) designation being advanced by the International Association of Insurance Supervisors (IAIS), which performs a role equivalent to that of the Basel Committee on Banking Supervision (BCBS) of the BIS.
The most recent example of this congruence was the publication on July 9th of the IAIS’s Consultation Document on a BCR for G-SIIs. Work on setting a BCR is intended to underpin the creation of group-wide global capital standards- in other words a structure equivalent to that of the various iterations of “Basel” from the BCBS. Similarly, the IAIS intends to develop a Higher Loss Absorbency (HLA) requirement for G-SIIS before the end of 2015. Once that is in place, IAIS will develop a risk-based, group-wide, global insurance capital standard (ICS) before the end of 2016, to be applied to Internationally Active Insurance Groups (IAIGs) in 2019.
Now that we have all the jargon and prospective timing out of the way, why should anyone care about this? In our view, the Board and Executive Management of any multi-national (re)insurance group need to pay attention to these developments for a number of reasons:
- To ensure that regulators do not go “off track” in assessing the real risks within a (re)insurance business
- To avoid the “death by a thousand cuts” that the Solvency II process became in the EU
- To try to minimize the risk of ICS becoming the sort of mind-numbing, absurdly complex imposition that Basel III or its national derivations have mutated into
- To be able to head off any false analogies that insurance regulators may try to apply from the banking industry- Insurance LCR, perhaps?
We are, of course, completely supportive of regulation that is intended to create a “level playing field” and to ensure that the we and our (re)insurance partners are able to continue to deliver appropriately capitalized and supported solutions to our diverse range of global clients. However, in observing the consequences, many of them unintended or counter-productive, caused by trends in banking regulation, and knowing how insurance regulators have frequently “followed” a banking-style approach, we believe that the (re)insurance industry needs to remain vigilant and engaged in a dialogue with the IAIS and local regulators to help achieve a rational framework that is “fit-for-purpose” and not some monstrous offshoot of Basel III.
-The Awbury Team